Pub. 3 2013-2014 Issue 3

O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S November • December 2013 13  Compensation Plan  continued on page 14 Begin by Understanding Your Shortfall By design, qualified plans regulated by ERISA (the Employee Retirement Income Security Act) do not provide top executives with sufficient retirement benefits and do not reflect the share- holder value they create. Salary caps, the virtual elimination of defined benefit pension plans and the relatively low level of 401(k) matching contributions typically limit executives’ retire- ment benefits to 30 to 50 percent of final pay. Knowing the extent of your shortfall (amount needed at retirement compared to estimated amount available) is vital to the design of an effective nonqualified plan. Regulatory guidance says that the overall compensation package must be reasonable; therefore, SERPs and other non- qualified plans should take into consideration other compensa- tion being provided. Prevalence of Nonqualified Plans Such plans are common in the banking industry. According to the American Bankers Association’s 2012 Compensation and Benefits Survey, 68 percent offer some kind of a nonqualified deferred compensation plan for topmanagement (CEO,C-Level, EVP), and 43 percent of respondents offer a SERP. Nonqualified Plan Basics • Supplemental executive retirement plans (SERPs) can be designed to address an executive’s shortfall. Generally, Nationally recognized for our corporate, regulatory, and litigation practices for community banks. O ering a range of legal services to our banking community: • A liate Transactions • Asset-Based Lines of Credit • Bank Operations • Brand Banking • Compliance & Disclosure • Consumer Finance • Credit Document Drafting and Review • Creditor’s Rights/Bankruptcy • DeNovo Financial Institutions Charters • Factoring • Foreclosures and Collections • Holding Company Formations • Lender Liability • Lending Limit Advice • Leveraged Acquisitions • Litigation • Loan Originations and Modi cations • Loan Restructuring • Mergers and Acquisitions • New Product Development • Project Finance • Recapitalization • Regulatory Advice • Regulatory Enforcement Defense • OREO Disposition • Stock Offerings • Strategic Planning • Subchapter S Corporate Restructuring • Uniform Commercial Code • Use of ESOPs Contact: Karen L. Witt | 303.623.9000 | www.LRRLaw.com ALBUQUERQUE | CASPER | COLORADO SPRINGS | DENVER | LAS VEGAS | PHOENIX | RENO | TUCSON | SILICON VALLEY Effective September 2013 under the terms of a SERP, an institution will promise to pay a future retirement benefit to an executive, separate from any company-sponsored qualified retirement plan. • Deferred compensation plans (DCPs) minimize taxation on base salary and bonuses by allowing executives to make elective deferrals into a tax-deferred asset. The bank can also make contributions to the executive’s account using a matching or performance- based methodology. • Performance-driven benefit plans tie the bank’s overall objectives to an executive’s measurable performance. As these plans are based on reasonable performance benchmarks critical to the bank’s success, they address corporate governance concerns by increasing compensation only when objectives are met. Part or all of the distributions are made on a deferred basis for a variety of reasons. • Split-dollar plans allow the bank and the insured officer to share the benefits of a specific BOLI policy or policies upon the death of the insured. The agreement may state that the benefit terminates at separation from service or it may allow the officer to retain the life insurance benefit after retirement if certain vesting requirements are met. • Survivor-income plans/death benefit-only plans specify that the bank will pay a benefit to the officer’s survivor (beneficiary) upon his or her death. Typically, the bank will purchase BOLI to provide death proceeds to the